Incentives matter: this is the fundamental
concept in economics. People respond to incentives, so in order for us to predict people’s behavior,
we need to think about how their incentives have changed. For example when gas prices rise, people buy
less gasoline. They probably don’t stop buying gasoline, but they find ways to use
less. Maybe they combine their errands so they can take fewer trips. Prices are powerful
incentives. Government policy frequently relies on people’s response to incentives but often
fails to consider all the different ways it affects people’s incentives. For example there’s a strong desire in many
corners for people to use less gasoline. One way that government policy does this is by
CAFE standards. These are government mandates for car manufacturers to sell a fleet of vehicles
that have an average fuel efficiency at or above the standard, for example, 25 miles
per gallon. The idea is that if car manufacturers produce more fuel-efficient cars, consumers
will buy more fuel-efficient cars and use less gasoline. Sounds great, but this is where
economics comes in. As a consumer what happens to my incentive?
I buy a more fuel-efficient car. Well, now if before it took me 20 gallons of gasoline
to drive to visit my parents, now maybe it takes me 18. It lowers the cost of me driving
to visit my parents, so I’m going to drive to visit my parents more often. The change
in mandate reduces the cost of driving, inducing consumers to drive more miles. A good economist doesn’t just consider the
obvious effect of a policy: The change in mandate leads to more fuel-efficient cars.
A good economist also considers the less obvious effects: The change in mandate lowers the
cost of driving, inducing consumers to drive more miles with the attendant effects on pollution
and car emissions. Setting the right incentive and avoiding unintended consequences is difficult. Incentives matter is a relatively straightforward
concept. What’s difficult is to think about all the different ways the policymakers might
affect people’s incentives, and how that would change people’s behavior.

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10 thoughts on “Do Incentives Matter for the Economy? – Learn Liberty”

  1. That would be true in the situation you provided, but the data disagrees. The US demand for oil is declining due to those policies with little hint of those "unintended consequences".

  2. The majority of people just use their car to go to work and shop in a daily routine. You don't see people go off on road trip… So the assumption that people will drive more is faulty

  3. People commenting with criticism are fucking dumb, and miss the point entirely. The point is that if you reduce the negative costs associated with a certain behavior(in this case driving), you are provided with a greater incentive to do that behavior. The same is true of the opposite.

    Also, to the moron who asserts there's no evidence to suggest that the cost of driving impacts one's decision to drive, there's tons of data. Look at yearly summer oil consumption correlated with price.

  4. People base their summer vacation travel plans on the price of gas. Simply google "Price of gas impacts travel plans." This isn't fucking rocket science.

    "It assumes, with no reason, that the incentive for action is entirely based on price & money, as opposed to the inner desire for that action to occur."

    EddyBearr is a progressive idiot who doesn't understand price and behavioral correlation. If you increase the costs associated with an action, people become less inclined to do that action.

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